Co-investment, uncertainty, and opportunism:ex-Ante and ex-Post remedies

Abstract

Caused largely by the recent technological changes towards digitalization, infrastructure investment in network industries has become the main issue for regulatory intervention. In this paper, we study the impact of co-investment between an incumbent and an entrant on the roll-out of network infrastructures under demand uncertainty. We show that if the entrant can wait to co-invest until demand is realized, the incumbent’s investment incentives are reduced, and total coverage can be lower than in a benchmark with earlier co-investment. We consider two remedies to correct these distortions: (i) co-investment options purchased ex ante by the entrant from the incumbent, and (ii) risk premia paid ex post by the entrant. We show that co-investment options cannot fully reestablish total coverage, while premia can do so in most cases, though at the cost of less entry. Finally, we show that an appropriate combination of ex-ante and ex-post remedies can improve welfare.